ESPP Glossary

accountability

The obligation of a decision-maker (or body) to be responsive to the needs and wishes of people affected by his, her or its decisions (ESPP, TE1, TESA).

administratively feasible

Policies for which the government has sufficient information and staff for implementation (ESPP, TE1, TESA). Introduced in 12.7 Spending by democratic governments: Priorities of a nation, TE1.

adverse selection

The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. Example: The problem of asymmetric information in insurance. If the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the ‘hidden attributes’ problem (the state of already being ill is the hidden attribute), to distinguish it from the ‘hidden actions’ problem of moral hazard. The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. An example is the problem of asymmetric information in insurance: if the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the ‘hidden attributes’ problem (the state of already being ill is the hidden attribute), to distinguish it from the ‘hidden actions’ problem of moral hazard (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure, TE1, TESA. See also: incomplete contract, moral hazard, asymmetric information.

allocation

In an economic interaction, an allocation is a particular distribution of goods or other things of value to all participants. A description of who does what, the consequences of their actions, and who gets what as a result (for example in a game, the strategies adopted by each player and their resulting payoffs). A description of who does what, the consequences of their actions, and who gets what as a result (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.2 Goals of public policy, Micro, Micro, TE1, TESA.

altruism

Altruism is a social preference: a person who is willing to bear a cost to benefit somebody else is said to be altruistic. The willingness to bear a cost in order to help another person. Altruism is a social preference. The willingness to bear a cost in order to benefit somebody else (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.8 Social preferences and the public good, Micro, TE1, TE1, TESA, TESA. See also: social preferences.

antitrust policy

Government policy and laws to limit monopoly power and prevent cartels. Also known as: competition policy (ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, TESA.

arbitrage

The practice of buying a good at a low price in one market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit. The practice of buying a good at a low price in a market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit (ESPP, TE1, TESA). Introduced in 10.2 Assets, money, banks, and the financial system, TE1, TE1, TESA. See also: price gap.

artificially scarce good

A public good for which it is possible to exclude some people from enjoying. Also known as: club good. A public good that it is possible to exclude some people from enjoying. Also known as: club good (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure, TE1, TESA. See also: public good.

asset

An asset is something that is owned and has value. Anything of value that is owned (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, Micro, Macro, Macro, Macro, TE1, TE1, TESA, TESA. See also: balance sheet, liability.

asset price bubble

An asset price bubble is an episode in which the market price of an asset rises substantially and continuously over time, fuelled by expectations of future price increases (that is, people want to hold the asset because they believe that its price will be higher in future). Eventually the bubble bursts and the price drops suddenly. A sustained and significant rise in the price of an asset, fuelled by expectations of future price increases. Sustained and significant rise in the price of an asset fuelled by expectations of future price increases (Macro, ESPP, TE1, TESA). Introduced in 10.10 Asset market bubbles, Macro, TE1, TESA.

asymmetric information

Information that is relevant to all the parties in an economic interaction, but is known by some and not by others. Information that is relevant to the parties in an economic interaction, but is known by some but not by others (ESPP, TE1, TESA). Introduced in 6.2 Firms, markets, and the division of labour, 11.10 Property rights, contracts, and market failures, TE1, TE1, TE1, TE1, TESA, TESA, TESA. See also: adverse selection, moral hazard.

average product

The average product of an input is total output divided by the total amount of the input. For example, the average product of a worker (also known as labour productivity) is total output divided by the number of workers employed to produce it. Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in) (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.8 Hours of work and economic growth, 8.5 The product market and the price-setting curve (firms and customers), Micro, Micro, Micro, Macro, Macro, TE1, TE1, TE1, TESA, TESA.

balance sheet

A record of all the current assets and liabilities, and the net worth, of an economic actor such as a household, bank, firm, or government. A record of the assets, liabilities, and net worth of an economic actor such as a household, bank, firm, or government (Macro, ESPP, TE1, TESA). Introduced in 10.3 Money and banks, Macro, Macro, Macro, TE1, TESA. See also: net worth, liability.

bank

A firm that creates money in the form of bank deposits in the process of supplying credit (ESPP, TE1, TESA). Introduced in 10.2 Assets, money, banks, and the financial system, TE1, TESA.

bank money

Money in the form of deposits in commercial banks. The bank allows bank deposits, created for example when the bank makes a loan, to be used as a means of exchange, debiting the buyer’s deposit and crediting the seller with a new deposit. Money in the form of bank deposits created by commercial banks when they extend credit to firms and households (Macro, ESPP, TE1, TESA). Introduced in 10.2 Assets, money, banks, and the financial system, Macro.

bank run

A situation in which depositors withdraw funds from a bank because they fear that it may go bankrupt and not honour its liabilities (that is, not repay the funds owed to depositors) (Macro, ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, Macro, TE1, TESA.

bargaining power

The extent of a person or firm’s advantage in securing a larger share of the economic rents made possible by an interaction. The extent of a person’s advantage in securing a larger share of the economic rents made possible by an interaction (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.2 Institutions: The rules of the game, Micro, Micro, TE1, TE1, TE1, TESA.

base money

Cash held by households, firms, and banks, and the balances held by commercial banks in their accounts at the central bank, known as reserves. Also known as: high-powered money. Cash and the balances held by commercial banks in their accounts at the central bank, known as reserves. Also known as: legal tender, high-powered money (ESPP, TE1, TESA). Introduced in 10.2 Assets, money, banks, and the financial system.

behavioural experiment

An experiment designed to study some aspect of human behaviour (ESPP). Introduced in 2.8 Social preferences and the public good.

best response

In game theory, a player’s best response is the strategy that will bring about the player’s most-preferred outcome, given the strategies adopted by the other players. In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.5 When self-interest works: The invisible hand, Micro, TE1, TESA.

biologically feasible

An allocation that is capable of sustaining the survival of those involved is biologically feasible (ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, TE1, TESA.

budget constraint

An equation that represents all combinations of goods and services one could acquire that would exactly exhaust one’s budgetary resources. An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro, TE1, TE1, TESA, TESA.

capital goods

The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user. The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user. The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used (ESPP, TE1, TESA). Introduced in 1.4 Economic growth, TE1, TE1, TESA.

capitalism

An economic system in which the main form of economic organization is the firm, where the private owners of capital goods hire labour to produce goods and services to be sold in markets with the intent of making a profit. The main economic institutions in a capitalist economic system are private property, markets, and firms. An economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit. The main economic institutions in a capitalist economic system, then, are private property, markets, and firms. An economic system in which private property, markets, and firms play an important role (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, Micro, Macro, TE1, TESA.

capitalist revolution

Rapid improvements in technology combined with the emergence of a new economic system (ESPP, TE1, TESA). Introduced in 1.10 Varieties of capitalism: Growth and stagnation, TE1.

cartel

A group of firms that collude (work together) to set output and/or prices in order to raise their joint profits. A group of firms that collude in order to increase their joint profits (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, Micro, TE1, TE1, TESA.

causality

A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept (ESPP, TE1, TESA). Introduced in 3.1 Introduction, TE1, TESA. See also: natural experiment, correlation.

central bank

The only bank that can create base money. Usually part of the government. Commercial banks have accounts at this bank, holding base money. The only bank that can create a country’s legal tender. Usually part of the government. Commercial banks have accounts at this bank, holding legal tender (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, TE1, TESA. See also: base money.

ceteris paribus

Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is ‘other things equal’. In an economic model, it means an analysis ‘holds other things constant’. Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is ‘other things equal’. In an economic model it means an analysis ‘holds other things constant’ (Micro, Macro, ESPP, TE1, TESA).

club good

See: artificially scarce good, public good (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure. See also: artificially scarce good, public good.

co-insurance

A co-insurance scheme enables households to pool savings so that individual households can maintain consumption when they experience a temporary fall in income or the need for greater expenditure. A means of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditure (Macro, ESPP, TE1, TESA). Introduced in Macro, Macro, TE1, TE1, TE1, TESA, TESA.

collateral

An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, 10.6 The business of banking and bank balance sheets, Micro, Micro, Macro, Macro, Macro, TE1, TE1, TESA, TESA.

commodities

Physical goods traded in a manner similar to shares. They include metals such as gold and silver, and agricultural products such as coffee and sugar, oil and gas. Sometimes more generally used to mean anything produced for sale. Physical goods traded in a manner similar to stocks. They include metals such as gold and silver, and agricultural products such as coffee and sugar, oil and gas. Sometimes more generally used to mean anything produced for sale (ESPP, TE1, TESA). Introduced in 10.9 Changing supply and demand for a financial asset, TE1, TESA. See also: share.

common-pool resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable within a community of users. All members of the community are able (and in some cases have a legal right) to use it, but outsiders can be excluded. A rival good that one cannot prevent others from enjoying. Also known as: common property resource (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure, Micro, TE1, TESA. See also: rival good.

competition policy

Government policy and laws to limit monopoly power and prevent cartels. Also known as: antitrust policy (ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, TE1, TESA.

competitive equilibrium

A market is in competitive equilibrium if the quantity supplied is equal to the quantity demanded at the prevailing price, and all buyers and sellers are price-takers, so that no-one can benefit from attempting to trade at a different price. A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, TE1, TESA.

complements

Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other (ESPP, TE1, TESA). Introduced in TE1. See also: substitutes.

conflict of interest

The situation that arises in an interaction if, in order for one party to gain more, another party must do less well. The situation which arises if in order for one party to gain more from the interaction, another party must do less well (Micro, Macro, ESPP). Introduced in 9.3 Borrowing: Bringing consumption forward in time, Micro, Micro, Micro, Macro.

conspicuous consumption

The purchase of goods and services to publicly display one’s social and economic status. The purchase of goods or services to publicly display one’s social and economic status (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.10 Applying the model: Explaining differences between countries, Micro, TE1, TESA.

constant prices

To compare the value of goods and services bought or sold at different times we need to allow for changes in the value of the currency in which they are measured (inflation or deflation). To do this, we choose a base year, and then calculate the value of goods and services in other years using the prices in the base year: that is, at constant prices. Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time (Macro, ESPP, TE1, TESA). Introduced in 1.3 How did we get here? The hockey stick in real incomes, Macro, TE1, TESA. See also: purchasing power parity.

constant returns to scale

When production exhibits constant returns to scale, increasing all of the inputs to a production process by the same proportion increases output by the same proportion. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. These occur when doubling all of the inputs to a production process doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, Micro, Macro, TE1, TESA. See also: increasing returns to scale, decreasing returns to scale.

constrained choice problem

A problem in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit, or utility) subject to a constraint that determines the feasible set (such as the demand curve, or budget constraint). This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.7 Decision making and scarcity, 6.9 The employer sets the wage to minimize the cost per unit of effort, Micro, Micro, Macro, TE1, TE1, TESA. See also: constrained optimization problem.

constrained optimization problem

Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve) (ESPP, TE1, TESA). Introduced in 7.14 Conclusion, TE1, TESA.

consumer durables

Consumer goods with a life expectancy of more than three years such as home furniture, cars, and fridges (ESPP, TE1, TESA).

consumer price index (CPI)

A measure of the general level of prices that consumers have to pay for goods and services, including consumption taxes (Macro, ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, Macro, TE1, TESA.

consumer surplus

Each consumer who buys a good receives a surplus equal to their willingness to pay minus the price. The term ‘consumer surplus’ normally refers to the sum of these surpluses across all consumers. The consumer’s willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, Micro, Micro, TE1, TESA.

consumption (C)

Expenditure on both short-lived goods and services and long-lived goods, which are called consumer durables. Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables (ESPP, TE1, TESA). Introduced in Micro, Macro. See also: consumer durables.

consumption good

A good or service that satisfies the needs of consumers over a short period (ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs, TE1, TESA.

consumption smoothing

Actions taken by an individual, family, or other group in order to sustain their customary level of consumption. Actions include borrowing or reducing savings to offset negative shocks, such as unemployment or illness; and increasing saving or reducing debt in response to positive shocks, such as promotion or inheritance (Micro, Macro, ESPP). Introduced in 9.4 Reasons to borrow: Smoothing and impatience, Micro, Macro.

contract

A legal document or understanding that specifies a set of actions that parties to the contract must undertake (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.2 Firms, markets, and the division of labour, Micro, TE1, TE1, TESA, TESA.

cooperation

Participating in a common project that is intended to produce mutual benefits (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.7 Free riding and the provision of public goods, Micro, TE1, TESA.

cooperative firm

A firm that is mostly or entirely owned by its workers, who hire and fire the managers (ESPP, TE1, TESA). Introduced in 6.13 Another kind of business organization: Cooperative firms, TE1.

copyright

Ownership rights over the use and distribution of an original work (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.9 Unintended consequences of a redistributive tax, 11.11 Public goods, common pool resources, and market failure, Micro, TE1, TE1, TESA.

correlation

Two variables in a sample of data are said to be correlated if we observe that they tend to change together. If high values of one variable (e.g. people’s earnings) commonly occur along with high values of another variable (e.g. years of education) the variables are positively correlated. When high values of one variable (e.g. ice cream sales) are associated with low values of the other variable (e.g. number of people wearing winter coats) there is a negative correlation. If variables are correlated, it doesn’t mean that there is a causal relationship between them: higher ice cream sales might not have caused fewer people to wear winter coats. A statistical association in which knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. It can be positive or negative (it is negative when high values of one variable are observed with low values of the other). It does not mean that there is a causal relationship between the variables. A measure of how closely related two variables are. Two variables are correlated if knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. Correlation can be positive or negative. It is negative when high values of one variable are observed with low values of the other. Correlation does not mean that there is a causal relationship between the variables. Example: When the weather is hotter, purchases of ice cream are higher. Temperature and ice cream sales are positively correlated. On the other hand, if purchases of hot beverages decrease when the weather is hotter, we say that temperature and hot beverage sales are negatively correlated (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro, Macro, Macro, TE1, TESA, DE, DE, DE, DE. See also: causality, correlation coefficient.

correlation coefficient

A measure of how closely associated two variables are and whether they tend to take similar or dissimilar values, ranging from a value of 1 indicating that the variables take similar values (‘are positively correlated’) to –1 indicating that the variables take dissimilar variables (‘negative’ or ‘inverse’ correlation). A value of 1 or –1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of 0 indicates that knowing one of the variables provides no information about the value of the other. A numerical measure, ranging between 1 and −1, of how closely associated two variables are—whether they tend to rise and fall together, or move in opposite directions. A positive coefficient indicates that when one variable takes a high (low) value, the other tends to be high (low) too, and a negative coefficient indicates that when one variable is high the other is likely to be low. A value of 1 or −1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of indicates that knowing one of the variables provides no information about the value of the other (ESPP, DE, TE1, TESA). Introduced in DE, DE, DE, DE, DE, DE, DE, DE. See also: correlation, causality.

creative destruction

Joseph Schumpeter’s name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.7 The capitalist revolution, Micro, Macro, TE1, TE1, TESA.

credit-constrained, credit constrained

A description of individuals who are able to borrow only on unfavourable terms (ESPP, DE, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, TE1, TE1, TESA, TESA. See also: credit-excluded.

credit-excluded, credit excluded

A description of individuals who are unable to borrow on any terms (ESPP, DE, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, TE1, TE1, TESA, TESA. See also: credit-constrained.

credit rationing

The process by which those with less wealth borrow on unfavourable terms, compared to those with more wealth (ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, TE1, TESA.

crowding out

There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people’s ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding-out effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate. There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people’s ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate (ESPP, TE1, TESA). Introduced in 3.9 Unintended consequences of a redistributive tax, TE1, TE1, TESA, TESA.

cyclical unemployment

The additional unemployment above the equilbrium level that is caused by a fall in aggregate demand associated with the business cycle. Also known as: demand-deficient unemployment. The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with the business cycle. Also known as: demand-deficient unemployment (Macro, ESPP, TE1, TESA). Introduced in 8.16 Structural and cyclical unemployment: The role of demand, Macro, TE1, TE1, TESA, TESA. See also: equilibrium unemployment.

deadweight loss

A measure of the total loss of surplus (that is, potential gains from trade) relative to the maximum available in the market. A loss of total surplus relative to a Pareto-efficient allocation (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, Micro, Micro, TE1, TE1, TESA.

decile

A subset of observations, formed by ordering the full set of observations according to the values of a particular variable, and then splitting the set into ten equally-sized groups. For example, the 1st decile refers to the smallest 1% of values in a set of observations. A subset of observations, formed by ordering the full set of observations according to the values of a particular variable and then splitting the set into ten equally-sized groups. For example, the 1st decile refers to the smallest 10% of values in a set of observations (Macro, ESPP, DE). Introduced in Figures, 1.2 Affluence and income inequality, Macro, Macro. See also: percentile.

decreasing returns to scale

These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: diseconomies of scale (ESPP, TE1, TESA). Introduced in 7.1 Introduction. See also: increasing returns to scale.

default risk

The risk that credit given as loans will not be repaid (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, TE1, TESA.

deflation

A decrease in the general price level (Macro, ESPP, DE, TE1, TESA). Introduced in Macro, TE1, TE1, TE1, TESA, TESA. See also: inflation.

demand curve

A demand curve shows the number of units of a good that buyers would wish to buy at any given price. Also known as: demand function. The curve that gives the quantity consumers will buy at each possible price (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, TE1, TESA.

democracy

A political system that ideally gives equal political power to all citizens, and which is defined by individual rights such as freedom of speech, assembly, and the press; and fair elections in which virtually all adults are eligible to vote, and the government leaves office if it loses. A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 12.2 The limits of markets: Repugnant markets and merit goods, Micro, Macro, TE1, TE1, TESA.

depreciation

The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence) (Macro, ESPP, TE1, TESA). Introduced in 9.2 Income, consumption, and wealth, Macro, TE1, TE1, TESA.

developmental state

A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education, and other public policies. A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.8 Capitalism and growth: Cause and effect?, Micro, Macro, TE1, TESA.

difference-in-difference

A method that applies an experimental research design to outcomes observed in a natural experiment. It involves comparing the difference in the average outcomes of two groups, a treatment and control group, both before and after the treatment took place (ESPP). Introduced in 3.1 Introduction.

differentiated product

A product produced by a single firm that has some unique characteristics compared to similar products of other firms (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, TE1, TESA.

diminishing marginal product

A property of some production functions according to which each additional unit of input results in a smaller increment in total output than did the previous unit (ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs.

diminishing marginal returns to consumption

The value to the individual of an additional unit of consumption declines, the more consumption the individual has. Also known as: diminishing marginal utility (ESPP, TE1, TESA). Introduced in 9.4 Reasons to borrow: Smoothing and impatience, TE1, TESA.

diminishing marginal utility

If the value to the individual of an additional unit of some good declines the more that is consumed, holding constant the amount of other goods, we say that the good has diminishing marginal utility. A property of some utility functions according to which each additional unit of a given variable results in a smaller increment to total utility than did the previous additional unit. Also known as: diminishing marginal returns to consumption (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro.

discount rate

A measure of someone’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is equal to the slope of the indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate. A measure of a person’s impatience: how much that person values an additional unit of consumption now relative to an additional unit of consumption later. It is the absolute value of the slope of a person’s indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate. A measure of the person’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is the slope of the person’s indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.4 Reasons to borrow: Smoothing and impatience, Micro, TE1.

diseconomies of scale

These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: decreasing returns to scale (ESPP, TE1, TESA). Introduced in 7.1 Introduction, TE1, TESA. See also: economies of scale.

disequilibrium

A situation in which at least one of the actors can benefit by altering his or her actions and therefore changing the situation, given what everybody else is doing (ESPP, TESA). Introduced in 7.12 Changes in supply and demand, TESA.

disinflation

A decrease in the rate of inflation (Macro, ESPP, DE, TE1, TESA). Introduced in Macro, TE1, TESA. See also: inflation, deflation.

disposable income

A household or individual’s disposable income is the maximum they can spend (‘dispose of’) without borrowing or using savings, after paying tax and receiving transfers (such as unemployment insurance and pensions) from the government. It is also the maximum amount a household or individual could consume over a given time period while leaving their wealth unchanged. Disposable income is measured over a period of time, such as a year. Income available after paying taxes and receiving transfers from the government (Macro, ESPP, TE1, TESA). Introduced in 5.9 Measuring economic inequality, 9.2 Income, consumption, and wealth, Macro, TE1, TE1, TESA, TESA.

disutility of effort

The degree to which doing some task (effort) is unpleasant (ESPP). Introduced in 6.4 Other people’s money: The separation of ownership and control.

division of labour

The specialization of producers to carry out different tasks in the production process. The specialization of producers to carry out different tasks in the production process. Also known as: specialization (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 6.2 Firms, markets, and the division of labour, Micro, TE1, TE1, TESA, TESA.

dominant strategy

A strategy is dominant if it yields the highest pay-off for the player, no matter what strategies the other players choose. Strategy that yields the highest payoff for a player, no matter what the other players do. Action that yields the highest payoff for a player, no matter what the other players do (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.5 When self-interest works: The invisible hand, TE1, TESA.

dominant strategy equilibrium

A dominant strategy equilibrium is a Nash equilibrium in which the strategies of all players are dominant stategies. An outcome of a game in which every player plays his or her dominant strategy (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.5 When self-interest works: The invisible hand, Micro, TE1, TE1, TESA.

earnings

Wages, salaries, and other income from labour (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.2 Income, consumption, and wealth, Micro, TE1, TESA.

economic accountability

Accountability achieved by economic processes, notably competition among firms or other entities in which failure to take account of those affected will result in losses in profits or in business failure (ESPP, TE1, TESA). Introduced in 12.3 The government as an economic actor, TE1. See also: accountability, political accountability.

economic cost

The direct costs of an action (including monetary costs and costs of effort, for example), plus the opportunity cost. The out-of-pocket cost of an action, plus the opportunity cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.3 Decision making, trade-offs, and opportunity costs, Micro, TE1, TESA.

economic inequality

Differences among members of a society in some economic attribute such as wealth, income, or wages (ESPP). Introduced in 1.11 Capitalism, inequality, and democracy.

economic profit

A firm’s revenue minus its total costs (including the opportunity cost of capital) (ESPP, TE1, TESA). Introduced in 8.9 Declining competition and increasing inequality in the US, TE1.

economic rent

Economic rent is the difference between the net benefit (monetary or otherwise) that an individual receives from a chosen action, and the net benefit from the next best alternative (or reservation option). A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option) (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.3 Decision making, trade-offs, and opportunity costs, 5.4 The rule of force: Bruno appears and has unlimited power over Angela, 7.6 Gains from trade, Micro, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, TESA. See also: reservation option.

economic system

A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the twentieth century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the nineteenth century), and capitalism (most of the world’s economies today). A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the 2th century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the 19th century), and capitalism (most of the world’s economies today). The institutions that organize the production and distribution of goods and services in an entire economy (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, Micro, TE1, TESA.

economically feasible

Policies for which the desired outcomes are a Nash equilibrium, so that once implemented private economic actors will not undo the desired effects (ESPP, TE1, TESA). Introduced in 12.7 Spending by democratic governments: Priorities of a nation, TE1.

economics

Economics is the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this changes over time and differs across societies. The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 2.14 The economy and economics, Micro, Micro, TE1, TESA.

economies of scale

These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. Also known as: increasing returns to scale (ESPP, TE1, TESA). Introduced in 7.1 Introduction, 11.3 Markets, specialization, and the division of labour, TE1, TE1, TE1, TE1, TESA. See also: diseconomies of scale.

efficiency unit

A unit of effort is sometimes called an efficiency unit (ESPP). Introduced in 6.9 The employer sets the wage to minimize the cost per unit of effort.

efficiency wages

The payment an employer makes that is higher than an employee’s reservation wage, so as to motivate the employee to provide more effort on the job than he or she would otherwise choose to make (ESPP, TE1, TESA). Introduced in 6.9 The employer sets the wage to minimize the cost per unit of effort, TE1, TESA. See also: labour discipline model, employment rent.

employment rate

The employment rate is the fraction of the population of working age that is employed. The ratio of the number of employed to the population of working age (Macro, ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, TE1, TESA. See also: population of working age.

employment relationship

The interaction between an employee and an employer in which the employer sets the hours and other conditions of work and the wage, directs the employee’s activities and may terminate her employment, and the employee chooses how hard to work and whether to quit her job. The employee’s level of effort, or her decision to remain in the firm, are determined by the choices made by the two parties—and are affected by the exercise of power by the employer and the social norms of both parties (ESPP). Introduced in 6.4 Other people’s money: The separation of ownership and control, 8.15 Looking backward: Baristas and bread markets.

employment rent

The economic rent a worker receives when the net value of their job exceeds the net value of their next best alternative (that is, being unemployed). The economic rent a worker receives when the net value of their job exceeds the net value of their next best alternative (that is, being unemployed). Also known as: cost of job loss. The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). Also known as: cost of job loss (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.7 Employment rents, 8.2 Measuring the economy: Employment and unemployment, Micro, Micro, Macro, Macro, TE1, TE1, TESA, TESA. See also: economic rent.

endogenous

Endogenous means ‘generated by the model’. In an economic model, a variable is endogenous if its value is determined by the workings of the model (rather than being set by the modeller). Produced by the workings of a model rather than coming from outside the model (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro, Micro, TE1, TESA, DE, DE, DE, DE. See also: exogenous.

endowment

A person’s endowments are the things they have that enable them to receive income. They include physical wealth (for example: land, housing, machinery); financial wealth (for example: savings, stocks/shares, bonds); intellectual property (for example: patents, copyrights); knowledge, skills, abilities, and experience that affect labour income; citizenship and rights to work. They can include characteristics such as nationality, gender, race, and social class, if these affect their income. The facts about an individual that may affect his or her income, such as the physical wealth a person has, either land, housing, or a portfolio of shares (stocks). Also includes level and quality of schooling, special training, the computer languages in which the individual can work, work experience in internships, citizenship, whether the individual has a visa (or green card) allowing employment in a particular labour market, the nationality and gender of the individual, and even the person’s race or social class background (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.9 Measuring economic inequality, 12.12 The distributional impact of public policies: Early childhood education, Micro, TE1. See also: human capital.

entrepreneur

A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.7 The capitalist revolution, Micro, TE1, TESA.

equilibrium

An equilibrium is a situation or model outcome that is self-perpetuating: if the outcome is reached it does not change, unless an external force disturbs it. By an ‘external force’, we mean something that is determined outside the model. A model outcome that does not change unless an outside or external force is introduced that alters the model’s description of the situation. A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.5 When self-interest works: The invisible hand, 4.1 Introduction, 7.9 Buying and selling: Demand and supply in a competitive market, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TESA, TESA.

equilibrium unemployment

The number of people seeking work but without jobs, which is determined by the intersection of the wage-setting and price-setting curves. This is the Nash equilibrium of the labour market and product market where neither employers nor workers could do better by changing their behaviour. The number of people seeking work but without jobs, which is determined by the intersection of the wage-setting and price-setting curves. This is the Nash equilibrium of the labour market where neither employers nor workers could do better by changing their behaviour (ESPP, TE1, TESA). Introduced in 8.6 Wages, profits, and unemployment in the aggregate economy, TE1, TESA. See also: involuntary unemployment, cyclical unemployment, wage-setting curve, price-setting curve, inflation-stabilizing rate of unemployment.

equity

Shares (stocks) in a business are known collectively as equity. The total value of the equity held by the shareholders is equal to the net worth of the business, and an individual shareholder’s equity in the business is the total value of the shares they own. The term equity is also used more generally for a share of ownership of any asset, and for the net worth of any household, business, or project. There is a second entirely different use of the term, meaning fairness, as in ‘an equitable division of the pie’. An individual’s own investment in a project. This is recorded in an individual’s or firm’s balance sheet as net worth. An individual’s own investment in a project. This is recorded in an individual’s or firm’s balance sheet as net worth. An entirely different use of the term is synonymous with fairness (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, 10.6 The business of banking and bank balance sheets, Micro, Micro, Micro, Macro, Macro, Macro, TE1, TE1, TE1, TESA, TESA, TESA. See also: net worth.

excess demand

A situation in which the quantity of a good demanded is greater than the quantity supplied at the current price (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, 11.5 Prices as messages, Micro, Micro, Macro, TE1, TESA. See also: excess supply.

excess supply

A situation in which the quantity of a good supplied is greater than the quantity demanded at the current price (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, 8.6 Wages, profits, and unemployment in the aggregate economy, Micro, Macro, TE1, TE1, TESA, TESA. See also: excess demand.

exogenous

Exogenous means ‘generated outside the model’. In an economic model, a variable is exogenous if its value is set by the modeller, rather than being determined by the workings of the model itself. Coming from outside the model rather than being produced by the workings of the model itself (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 7.12 Changes in supply and demand, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TE1, TESA, TESA, TESA, DE, DE, DE, DE. See also: endogenous.

exogenous shock

An exogenous shock (for example a demand shock or a supply shock) is a change in one or more of the exogenous variables in a model—that is, variables that are othewise held constant by the modeller. A sharp change in external conditions affecting a model (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro, Macro.

external benefit

A positive external effect: that is, a positive effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit in a contract. Also known as: external economy (ESPP, TE1, TESA). Introduced in 11.9 External effects: Government policies and income distribution, TE1, TESA. See also: external effect.

external cost

A negative external effect: that is, the negative effect of production, consumption, or other economic decisions on another person or party, which is not specified as a liability in a contract. Also known as: external diseconomy (ESPP, TE1, TESA). Introduced in 11.7 Market failure: External effects of pollution. See also: external effect.

external diseconomy

A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract. Also known as: external cost, negative externality (ESPP, TE1, TESA). Introduced in 11.10 Property rights, contracts, and market failures, TE1, TESA. See also: external effect.

external economy

A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality. A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality (ESPP, TE1, TESA). Introduced in 11.10 Property rights, contracts, and market failures, TE1, TESA. See also: external effect.

external effect

When a person’s action confers a benefit or cost on some other individual, and this effect is not taken account of by the person in deciding to take the action. It is external because it is not included in the decision-making process of the person taking the action. Positive effects refer to benefits, and negative effects to costs, that are experienced by others. A person breathing second-hand smoke from someone else’s cigarette is a negative external effect. Enjoying your neighbour’s beautiful garden is a positive external effect. Also known as: externality. A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract. Also known as: externality (ESPP, TE1, TESA). Introduced in 1.12 Capitalism, growth and environmental sustainability, 2.1 Introduction, 4.10 Applying the model: Explaining differences between countries, 10.13 The role of banks in the crisis, 11.7 Market failure: External effects of pollution, TE1, TE1, TESA. See also: incomplete contract, market failure, external benefit, external cost.

fairness

A way to evaluate an allocation based on one’s conception of justice (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, Micro, Micro, Macro, TE1, TE1, TESA, TESA.

feasible frontier

The curve or line made of points that defines the maximum feasible quantity of one good for a given quantity of the other. The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.6 The feasible set, 9.3 Borrowing: Bringing consumption forward in time, 10.6 The business of banking and bank balance sheets, Micro, Micro, Micro, Macro, TE1, TESA. See also: feasible set.

feasible set

All of the combinations of goods or outcomes that a decision-maker could choose, given the economic, physical, or other constraints that they face. All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.6 The feasible set, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TESA, TESA. See also: feasible frontier.

financial deregulation

Policies allowing banks and other financial institutions greater freedom in the types of financial assets they can sell, as well as other practices (ESPP, TE1, TESA). Introduced in 10.12 Banks, housing, and the global financial crisis, TE1.

firms

Economic organizations in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit (ESPP). Introduced in 1.7 The capitalist revolution, 6.2 Firms, markets, and the division of labour, Micro, TE1.

fiscal capacity

The ability of a government to impose and collect substantial taxes from a population at low administrative and other costs. One measure of this is the amount collected divided by the cost of administering the tax system (ESPP, TE1, TESA). Introduced in 12.9 Administrative feasibility: Information and capacities, TE1.

Fisher equation

The relation that gives the real interest rate as the difference between the nominal interest rate and expected inflation: real interest rate = nominal interest rate – expected inflation (Macro, ESPP, TE1, TESA). Introduced in 9.6 Storing or lending allows smoothing and moving consumption to the future, Macro, TE1, TESA.

fixed costs

Costs of production that do not vary with the number of units produced (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, TE1, TESA.

flow variable

A quantity measured per unit of time, such as annual income or hourly wage (ESPP). Introduced in 9.2 Income, consumption, and wealth. See also: stock variable.

free ride

Benefiting from the contributions of others to some cooperative project without contributing oneself (ESPP, TE1, TESA). Introduced in 2.2 Two types of social interaction, 6.4 Other people’s money: The separation of ownership and control, TE1, TE1, TESA, TESA.

fundamental value of a share

The share price based on anticipated future earnings and the level of risk. The share price based on anticipated future earnings and the level of systematic risk, which can be interpreted as a measure of the benefit today of holding the asset now and in the future (ESPP, TE1, TESA). Introduced in 10.10 Asset market bubbles, TE1, TE1, TESA, TESA.

gains from exchange

The benefits that each party gains from a transaction compared to how they would have fared without the exchange. Also known as: gains from trade (ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, 7.6 Gains from trade, TE1, TE1, TE1, TESA, TESA. See also: economic rent.

game

A model of strategic interaction that describes the players, the feasible strategies, the order of play, the information that the players have, and their pay-offs. A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.4 Social interactions as games, 6.8 Work effort and wages: The labour discipline model, Micro, TE1, TESA. See also: game theory.

game theory

A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.4 Social interactions as games, Micro, TE1, TESA. See also: game.

gender division of labour

The ways men and women differ in how they spend their (paid and unpaid) work time. The ways men and women differ in how they spend their work time (Micro, Macro, ESPP). Introduced in 4.10 Applying the model: Explaining differences between countries, Micro.

gig economy

An economy made up of people performing services matched by means of a computer platform with those paying for the service. Workers are paid for each task they complete, and not per hour. They are not legally recognized as employees of the company that owns the platform, and typically receive few benefits from the owners, other than matching (ESPP). Introduced in 6.4 Other people’s money: The separation of ownership and control.

Gini coefficient

A measure of inequality of a quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it). It is the average difference in, say, income between every pair of individuals in the population relative to the mean income, multiplied by one-half. Other than for small populations, a close approximation to the Gini coefficient can be calculated from a Lorenz curve diagram. A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it) (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 5.9 Measuring economic inequality, 8.9 Declining competition and increasing inequality in the US, Micro, Micro, Macro, Macro, TE1, TESA, DE. See also: Lorenz curve.

global financial crisis

This began in 27 with the collapse of house prices in the US, leading to the fall in prices of assets based on subprime mortgages and to widespread uncertainty about the solvency of banks in the US and Europe, which had borrowed to purchase such assets. The ramifications were felt around the world, as global trade was cut back sharply. Goverments and central banks responded aggressively with stabilization policies (ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, TE1.

governing elite

Top government officials such as the president, cabinet officials, and legislative leaders, unified by a common interest such as membership in a particular party (ESPP, TE1, TESA). Introduced in 12.5 Competition can limit political rent-seeking, TE1.

government

Within a given territory, the government is the only body that can legitimately use force (or threats of force) to control the behaviour of citizens. Also known as: the state. Within a given territory, the only body that can dictate what people must do or not do, and can legitimately use force and restraints on an individual’s freedom to achieve that end. Also known as: state (Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 12.3 The government as an economic actor, Macro, TE1.

government bond

A financial asset where the government borrows for a set period of time and promises to make regular fixed payments to the lender (and to return the money when the period is at an end). A financial instrument issued by governments that promises to pay flows of money at specific intervals (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, Micro, TE1, TE1, TESA, TESA.

government failure

A failure of political accountability. (This term is widely used in a variety of ways, none of them strictly analogous to market failure, for which the criterion is simply Pareto inefficiency) (ESPP, TE1, TESA). Introduced in 12.3 The government as an economic actor, TE1. See also: political accountability.

gross domestic product (GDP)

A measure of the market value of the output of final goods and services in the economy in a given period. GDP combines in a single number all the output (or production) carried out by the firms, non-profit institutions, and government bodies within a government’s territory. Output of intermediate goods that are inputs to final production is excluded to prevent double counting. Household production is part of GDP if it is sold. GDP is measured monthly, quarterly, and annually. A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting. A measure of the market value of the output of the economy in a given period (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro, Macro, Macro, TE1, TE1, TESA, TESA.

gross domestic product (GDP) per capita

A measure of the market value of the output of the economy in a given period (GDP) divided by the population (ESPP). Introduced in 1.3 How did we get here? The hockey stick in real incomes.

gross income

Income net of taxes paid. Includes depreciation (ESPP, TE1, TESA). See also: income, net income.

hawk-dove game

A coordination game in which the players want to coordinate on the opposite action from their opponent, and in each of the Nash equilibria, (Hawk, Dove) and (Dove, Hawk), the Hawk obtains the higher pay-off; but both players choosing Hawk is the worst outcome for both. A game in which there is conflict (when hawks meet), sharing (when doves meet), and taking (by a hawk when it meets a dove) (Micro, Macro, ESPP, TESA). Introduced in 2.13 Conflicts of interest in the global climate change problem, TESA, Micro.

hedge finance

Financing used by firms to fulfil contractual payment obligations using cashflow. Term coined by Hyman Minsky in his Financial Instability Hypothesis (ESPP, TE1, TESA). Introduced in TE1. See also: speculative finance.

hidden actions (problem of)

This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working. Also known as: moral hazard (ESPP, TE1, TESA). Introduced in 6.15 Principals and agents: Interactions under incomplete contracts, 11.11 Public goods, common pool resources, and market failure, TE1, TE1, TE1, TESA, TESA, TESA. See also: hidden attributes (problem of).

hidden attributes (problem of)

This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. Example: an individual purchasing health insurance knows her own health status, but the insurance company does not. Also known as: adverse selection. This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. An example is that the individual purchasing health insurance knows her own health status, but the insurance company does not. Also known as: adverse selection (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure, TE1, TE1, TESA, TESA. See also: hidden actions (problem of).

homo economicus

Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own self-interest. Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own of self-interest. Latin for ‘economic man’, referring to an actor assumed to adopt behaviours based on an amoral calculation of self-interest (Micro, Macro, ESPP).

human capital

The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in human capital, through education, training, and socialization can increase the stock. Human capital is part of an individual’s endowment. The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. It is part of an individual’s endowments. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth. The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth. Part of an individual’s endowments (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.2 Income, consumption, and wealth, Micro, Micro, Macro, TE1, TE1, TE1, TESA, TESA. See also: endowment.

impatience

A preference for consuming something sooner rather than later. Impatience may by situational (because the person has little now and will have more later); or intrinsic, in which case they would prefer to consume more now rather than the same amounts now and later. Any preference to move consumption from the future to the present. This preference may be derived either from pure impatience or diminishing marginal returns to consumption (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.4 Reasons to borrow: Smoothing and impatience, Micro.

inactive population

People in the population of working age who are neither employed nor actively looking for paid work. Those working in the home raising children, for example, are not considered as being in the labour force and therefore are classified this way (ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, TE1, TESA.

incentive

An economic reward or punishment, which influences the benefits and costs of alternative courses of action. Economic reward or punishment, which influences the benefits and costs of alternative courses of action (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.6 Wages, profits, and unemployment in the aggregate economy, Micro, Micro, Micro, TE1, TE1, TESA, TESA.

income

In general, income refers to any flow of resources (goods, or money) that an individual (or other economic actor) receives over time. It is the amount received per period. It could include labour earnings, profits, rent from property, or interest on assets. Your income is the maximum amount that you could consume per period and leave your wealth unchanged. The amount of labour earnings, dividends, interest, rent, and other payments (including transfers from the government) received by an economic actor, net of taxes paid, measured over a period of time, such as a year. The maximum amount that you could consume and leave your wealth unchanged. Also known as: disposable income. The amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. The maximum amount that you could consume and leave your wealth unchanged. Also known as: disposable income (Macro, ESPP, TE1, TESA). Introduced in 9.2 Income, consumption, and wealth, TE1, TESA. See also: pre-tax income.

income effect

The effect that an increase in income has on an individual’s demand for a good (the amount that the person chooses to buy) because it expands the feasible set of purchases. When the price of a good changes, this has an income effect because it expands or shrinks the feasible set, and it also has a substitution effect. The effect, for example, on the choice of consumption of a good that a change in income would have if there were no change in the price or opportunity cost. The effect that the additional income would have if there were no change in the price or opportunity cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.9 Applying the model: Explaining changes in working hours, 8.6 Wages, profits, and unemployment in the aggregate economy, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TESA. See also: substitution effect.

income elasticity of demand

The percentage change in demand that would occur in response to a 1% increase in the individual’s income (ESPP, TE1, TESA). Introduced in 7.13 The world oil market, TE1, TESA.

income net of depreciation

Disposable income minus depreciation (ESPP). Introduced in 9.2 Income, consumption, and wealth. See also: disposable income, gross income, depreciation.

incomplete contract

A contract that does not specify, in a way that can be enforced by a court, every aspect of the exchange that affects the interests of parties to the exchange (or of others). A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of any others affected by the exchange). A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others) (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 6.4 Other people’s money: The separation of ownership and control, 8.15 Looking backward: Baristas and bread markets, 11.10 Property rights, contracts, and market failures, Micro, Micro, Micro, Micro, TE1, TE1, TE1, TESA, TESA, TESA.

increasing returns to scale

These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. Also known as: economies of scale (ESPP, TE1, TESA). Introduced in 7.1 Introduction, TESA. See also: decreasing returns to scale, constant returns to scale.

indifference curve

A curve that joins together all the combinations of goods that provide a given level of utility to the individual. A curve of the points which indicate the combina­tions of goods that provide a given level of utility to the individual (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs, 9.3 Borrowing: Bringing consumption forward in time, 10.6 The business of banking and bank balance sheets, Micro, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TESA, TESA.

Industrial Revolution

A wave of technological advances and organizational changes that began in Britain in the eighteenth century; it transformed an agricultural and craft-based economy into a commercial and industrial economy. A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, Micro, Micro, TE1, TE1, TESA, TESA.

inequality aversion

A preference for more equal outcomes and a dislike of outcomes in which some individuals (even if they include oneself) receive more than others. A dislike of outcomes in which some individuals receive more than others. It is considered a social preference (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.8 Social preferences and the public good, TE1, TE1, TESA. See also: social preferences

inferior good

A good whose consumption decreases when income increases (holding prices constant) (ESPP). Introduced in 4.9 Applying the model: Explaining changes in working hours.

inflation

An increase in the general price level in the economy, usually measured as the percentage increase in prices over the last year. An increase in the general price level in the economy. Usually measured over a year (Macro, ESPP, DE, TE1, TESA). Introduced in 1.3 How did we get here? The hockey stick in real incomes, Macro, TE1, TE1, TESA, TESA, DE, DE, DE, DE. See also: deflation, disinflation.

inflation-stabilizing rate of unemployment

The unemployment rate (at labour market equilibrium) at which inflation is constant. Originally known as the ‘natural rate’ of unemployment. Also known as: non-accelerating rate of unemployment, stable inflation rate of unemployment (ESPP, TE1, TESA). Introduced in TE1, TESA. See also: equilibrium unemployment.

insolvent

An entity is this if the value of its assets is less than the value of its liabilities (ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, 10.6 The business of banking and bank balance sheets, TE1, TESA. See also: solvent.

institution

An institution is a set of laws and informal rules that regulate social interactions among people, and between people and the biosphere; sometimes also termed ‘the rules of the game’. The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game. The laws and social customs governing the way people interact in society (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 5.2 Institutions: The rules of the game, Micro, Micro, Macro, TE1, TESA.

interest rate

The price of bringing some spending power forward in time. The price of bringing some buying power forward in time (ESPP, TE1, TESA). Introduced in 9.3 Borrowing: Bringing consumption forward in time, TE1, TESA. See also: nominal interest rate, real interest rate.

interest rate (short-term)

The price of borrowing base money. This is a nominal interest rate (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, 9.3 Borrowing: Bringing consumption forward in time, TE1, TESA, TE1, TESA.

investment (I)

Expenditure on newly produced capital goods (machinery and equipment) and buildings, including new housing (ESPP, TE1, TESA). Introduced in Micro.

invisible hand game

A game in which there is a single Nash equilibrium that is Pareto efficient may be called an invisible hand game. A game in which there is a single Nash equilibrium and where there is no other outcome in which both players would be better off or at least one better off and the other not worse off (Micro, Macro, ESPP). Introduced in 2.5 When self-interest works: The invisible hand, Micro. See also: Nash equilibrium, Pareto efficient.

involuntary unemployment

A person is involuntarily unemployed if they are seeking work, and willing to accept a job at the going wage for people of their level of skill and experience, but unable to secure employment. A person who is seeking work, and willing to accept a job at the going wage for people of their level of skill and experience, but unable to secure employment is involuntarily unemployed (Micro, Macro, ESPP). Introduced in 6.10 Why there is always involuntary unemployment, 8.6 Wages, profits, and unemployment in the aggregate economy, Micro, Macro.

irrational exuberance

A process by which assets become overvalued. The expression was first used by Alan Greenspan, then chairman of the US Federal Reserve Board, in 1996. It was popularized as an economic concept by the economist Robert Shiller (ESPP, TE1, TESA). Introduced in 10.10 Asset market bubbles, TE1, TESA.

isocost line

A line that represents all combinations of inputs that cost a given total amount. A line that represents all combinations that cost a given total amount (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.9 The employer sets the wage to minimize the cost per unit of effort, Micro, TE1, TESA.

isoprofit curve

A curve that joins together the combinations of prices and quantities of a good that provide equal profits to a firm. A curve on which all points yield the same profit (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, Micro, TESA.

joint surplus

The sum of the economic rents of all involved in an economic interaction. The sum of the economic rents of all involved in an interaction. Also known as: gains from exchange. The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade (Micro, Macro, ESPP, TE1). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, Micro, Micro, TE1.

labour discipline model

A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination (ESPP, TE1, TESA). Introduced in 6.8 Work effort and wages: The labour discipline model, 8.2 Measuring the economy: Employment and unemployment, TE1, TESA. See also: employment rent, efficiency wages.

labour force

The number of people in the population of working age who are, or wish to be, in work outside the household. They are either employed (including self-employed) or unemployed. The number of people in the population of working age who are, or wish to be, in work outside the household. They are either employed (including self-employed) or unemployed (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, TE1, TESA. See also: unemployment rate, employment rate, participation rate.

labour productivity

Total output divided by the number of hours or some other measure of labour input (ESPP, TE1, TESA). Introduced in 8.5 The product market and the price-setting curve (firms and customers), TE1, TE1, TESA.

lending rate (bank)

The average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is known as the markup or spread on commercial lending. This is a nominal interest rate. Also known as: market interest rate. The average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is the markup or spread on commercial lending. Also known as: market interest rate (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, TE1, TE1, TESA, TESA. See also: interest rate, policy rate.

leverage ratio (for banks or households)

The value of assets divided by the equity stake in those assets. The value of assets divided by the equity stake (capital contributed by owners and shareholders) in those assets (ESPP, DE, TE1, TESA). Introduced in 10.6 The business of banking and bank balance sheets, TE1, TE1, TESA, DE, DE, DE, DE.

liability

A debt; an amount that is owed, with a contractual obligation to repay it in future. Anything of value that is owed (Macro, ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, Macro, Macro, TE1, TESA. See also: balance sheet, asset.

liquidity

Ease of buying or selling a financial asset at a predictable price (ESPP, TE1, TESA). Introduced in 10.6 The business of banking and bank balance sheets, TE1, TESA.

liquidity risk

The risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial loss (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, TE1, TE1, TESA.

Lorenz curve

A graphical representation of the inequality of some quantity such as income or wealth. Taking income as an example, individuals in the population are arranged in ascending order of income. First we calculate the total income of the population. Then for each level of income, we plot the percentage of total income held by people at this income level or lower, against the percentage of people at this income level or lower. The area between the Lorenz curve and the 45-degree line, expressed as a fraction of the total area below the 45-degree line, is a measure of inequality. Other than for small populations, it is a close approximation to the Gini coefficient. A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 5.9 Measuring economic inequality, 8.9 Declining competition and increasing inequality in the US, Macro, TE1, TESA, DE. See also: Gini coefficient.

marginal cost

The increase in total cost when one additional unit of output is produced. It corresponds to the slope of the total cost function at each point. The addition to total costs associated with producing one additional unit of output. The effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, 8.5 The product market and the price-setting curve (firms and customers), Micro, Micro, Macro, TE1, TE1, TE1, TESA, TESA, TESA.

marginal external cost, MEC, marginal external cost (MEC)

The marginal external cost (MEC) is the cost of an additional unit of output that is incurred by someone other than the producer (or the sum of these costs if several others are affected). The marginal social cost is the sum of the MEC and the marginal private cost to the producer: MSC = MEC + MPC. The cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.7 Market failure: External effects of pollution, Micro, TE1, TESA. See also: marginal private cost, marginal social cost.

marginal private benefit, MPB, marginal private benefit (MPB)

The benefit for a producer or consumer of producing or consuming an additional unit of a good. It is called the marginal private benefit, or MPB, to emphasise that it doesn’t include any external benefits conferred on others. The benefit (in terms of profit, or utility) of producing or consuming an additional unit of a good for the individual who decides to produce or consume it, not taking into account any benefit received by others.  (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.8 External effects and private bargaining, Micro, Macro, TE1, TESA. See also: marginal external benefit, marginal social benefit.

marginal private cost, MPC, marginal private cost (MPC)

The cost for the producer of producing an additional unit of output. It is called the marginal private cost, or MPC (rather than simply the marginal cost) when we want to emphasise that it doesn’t include any external costs that production imposes on others. The cost for the producer of producing an additional unit of a good, not taking into account any costs its production imposes on others (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.7 Market failure: External effects of pollution, Micro, TE1, TESA. See also: marginal external cost, marginal social cost.

marginal product

The marginal product of an input to production (for example, the marginal product of labour) is the additional amount of output produced in response to a 1-unit increase in the input. The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs, Micro, TE1, TE1, TESA, TESA.

marginal rate of substitution (MRS)

The trade-off that a person is willing to make between two goods. At any point, the MRS is the absolute value of the slope of the indifference curve. The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs, 5.3 Production and distribution: Using a model, 6.9 The employer sets the wage to minimize the cost per unit of effort, 7.5 The isoprofit curves and the demand curve, 10.6 The business of banking and bank balance sheets, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA. See also: marginal rate of transformation.

marginal rate of transformation (MRT)

The quantity of a good that must be sacrificed to acquire one additional unit of another good. At any point, it is the absolute value of the slope of the feasible frontier. A measure of the trade-offs a person faces in what is feasible. Given the constraints (feasible frontier) a person faces, the MRT is the quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier. The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.6 The feasible set, 5.3 Production and distribution: Using a model, 6.9 The employer sets the wage to minimize the cost per unit of effort, 7.5 The isoprofit curves and the demand curve, 9.3 Borrowing: Bringing consumption forward in time, 10.6 The business of banking and bank balance sheets, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA. See also: marginal rate of substitution.

marginal social benefit, MSB, marginal social benefit (MSB)

The marginal social benefit (MSB) is the benefit of the production or consumption of an additional unit of a good, including both the benefit for the producer or consumer (marginal private benefit) and the benefits conferred on others. MSB = MPB + MEB. The benefit (in terms of utility) of producing or consuming an additional unit of a good, taking into account both the benefit to the individual who decides to produce or consume it, and the benefit to anyone else affected by the decision (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.8 External effects and private bargaining, Micro, Micro, Macro, TE1, TESA.

marginal social cost, MSC, marginal social cost (MSC)

The marginal social cost (MSC) is the cost of producing an additional unit of output, including both the cost for the producer (marginal private cost) and the costs imposed on others (the MEC). MSC = MPC + MEC. The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good’s production. Marginal social cost is the sum of the marginal private cost and the marginal external cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.7 Market failure: External effects of pollution, Micro, Macro, TE1, TESA.

marginal utility

The additional utility resulting from a one-unit increase in the amount of a good. The additional utility resulting from a one-unit increase of a given variable (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, Micro, Micro, Micro, TE1, TESA.

market

A market enables people to exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), in a way that is often impersonal (unlike transfers among friends, family). A way that people exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), that is often impersonal (unlike transfers among friends, family). A market is a way of connecting people who may mutually benefit by exchanging goods or services through a process of buying and selling (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, Micro.

market-clearing price

The price at which the amount of the good demanded is equal to the amount supplied. At this price there is no excess supply or excess demand (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, TE1, TESA. See also: equilibrium.

market failure

If the allocation resulting from market interactions is not Pareto efficient, we describe the situation as a market failure. The term may be used loosely to refer to any interaction resulting in a Pareto-inefficient allocation, whether or not a specific market is concerned. When markets allocate resources in a Pareto-inefficient way (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, 10.13 The role of banks in the crisis, 11.1 Introduction, 12.3 The government as an economic actor, Micro, Micro, Macro, TE1, TE1, TESA, TESA.

market power

A firm has market power if it can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker). An attribute of a firm that can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker) (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, Micro, Micro, TE1, TESA.

maturity transformation

The practice of borrowing money short term and lending it long term. For example, a bank accepts deposits, which it promises to repay at short notice or no notice, and makes long-term loans (which can be repaid over many years). Also known as: liquidity transformation. The practice of borrowing money short-term and lending it long-term. For example, a bank accepts deposits, which it promises to repay at short notice or no notice, and makes long-term loans (which can be repaid over many years). Also known as: liquidity transformation (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, TE1, TESA.

mean

A summary statistic for a set of observations, calculated by adding all values in the set and dividing by the number of observations (ESPP, DE). Introduced in 1.3 How did we get here? The hockey stick in real incomes, DE, DE, DE, DE.

median

When a set of observations is arranged in order, the median is in the middle: half of the observations are above it, and half below. (More precisely, if the number of observations is odd, the median is the value of middle observation; if the number of obeservations is even, the median is the value halfway between the two middle observations.) The middle number in a set of values, such that half of the numbers are larger than the median and half are smaller. Also known as: 5th percentile (Macro, ESPP, DE). Introduced in 1.3 How did we get here? The hockey stick in real incomes, Macro, Macro, Macro.

merit goods

Goods and services that should be available to everyone, independently of their ability to pay (ESPP, TE1, TESA). Introduced in 12.2 The limits of markets: Repugnant markets and merit goods, TE1, TE1, TESA, Micro, Macro.

minimum acceptable offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. More generally in bargaining situations, it is the least favourable offer that would be accepted. In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.8 External effects and private bargaining, Micro, Micro, TE1, TE1, TESA, TESA.

missing market

When there is no market within which a potentially beneficial exchange or trade could occur, because of asymmetric or non-verifiable information, we say that the market for the good is missing. A market in which there is some kind of exchange that, if implemented, would be mutually beneficial. This does not occur due to asymmetric or non-verifiable information (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.10 Property rights, contracts, and market failures, Micro, Micro, TE1, TESA.

money

Money is something that acts as a store of value and is widely accepted as a means of exchange. Typically it is also used as the unit of account, for measuring the value of goods and services, and assets and liabilities. Some commodities can be used as money, but in a modern economy money in the hands of the public consists of commercial bank deposits and currency (notes and coins) issued by the central bank. Money is something that facilitates exchange (called a medium of exchange) consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose. The ‘because’ is important and it distinguishes exchange facilitated by money from barter exchange, in which goods are directly exchanged without money changing hands. Money is something that facilitates exchange (called a medium of exchange) consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose. The ‘because’ is important and it distinguishes exchange facilitated by money from barter exchange in which goods are directly exchanged without money changing hands. A medium of exchange consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is accepted as payment because others can use it for the same purpose (Macro, ESPP, TE1, TESA). Introduced in 10.3 Money and banks, Macro, TE1, TESA. See also: means of exchange, store of value.

monopolistic competition

A market in which each seller has a unique product but there is competition among firms because firms sell products that are close substitutes for one another (ESPP, TESA). Introduced in 7.6 Gains from trade, TESA.

monopoly

A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 7.6 Gains from trade, Micro, TE1, TE1, TESA. See also: monopoly power, natural monopoly.

monopoly power

The power that a firm has to control its own price. The fewer close substitutes for the product are available, the greater the firm’s price-setting power (ESPP, TE1, TESA). See also: monopoly.

monopoly rents

A form of profits, which arise due to restricted competition in selling a firm’s product. A form of economic profits, which arise due to restricted competition in selling a firm’s product (ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, TE1, TESA. See also: economic profit.

moral hazard

This term originated in the insurance industry to express the problem that insurers face, namely, the person with home insurance may take less care to avoid fires or other damages to his home, thereby increasing the risk above what it would be in absence of insurance. This term now refers to any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affected party does not have adequate information on the action. It is also referred to as the ‘hidden actions’ problem (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure, TE1, TE1, TESA, TESA. See also: hidden actions (problem of), incomplete contract, too big to fail.

mortgage (or mortgage loan)

A loan contracted by households and businesses to purchase a property without paying the total value at one time. Over a period of many years, the borrower repays the loan, plus interest. The debt is secured by the property itself, referred to as collateral (Macro, ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, Macro, TE1, TE1, TESA, TESA. See also: collateral.

mutual gains

An outcome of an interaction among two or more people, in which all parties are better off as a result than they would have been without the interaction (or at least some parties are better off and none are worse off) (ESPP). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope.

Nash equilibrium

A Nash equilibrium is an economic outcome where none of the individuals involved could bring about an outcome they prefer by unilaterally changing their own action. More formally, in game theory it is defined as a set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else. A set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.11 Predicting economic outcomes: A Nash equilibrium, 3.8 Implementing public policies, 6.8 Work effort and wages: The labour discipline model, 7.9 Buying and selling: Demand and supply in a competitive market, 8.6 Wages, profits, and unemployment in the aggregate economy, Micro, Micro, Micro, Micro, Macro, Macro, Macro, Macro, Macro, TE1, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, TESA. See also: game theory.

natural experiment

An empirical study that exploits a difference in the conditions affecting two populations (or two economies), that has occurred for external reasons: for example, differences in laws, policies, or weather. Comparing outcomes for the two populations gives us useful information about the effect of the conditions, provided that the difference in conditions was caused by a random event. But it would not help, for example, in the case of a difference in policy that occurred as a response to something else that might affect the outcome. An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausibly argued to be random (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 1.8 Capitalism and growth: Cause and effect?, 3.1 Introduction, 6.7 Employment rents, 12.5 Competition can limit political rent-seeking, Micro, Micro, Macro, Macro, Macro, TE1, TE1, TE1, TESA, TESA, TESA, DE, DE, DE, DE, DE.

natural monopoly

A production process in which the average cost curve is sufficiently downward-sloping, even in the long run, that a single firm can supply the whole market at lower average cost than two firms, making it impossible to sustain competition. A production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market (Micro, Macro, ESPP, TE1, TESA). Introduced in 12.3 The government as an economic actor, Micro, TE1, TE1, TESA.

negative feedback (process)

We say that negative feedback occurs if an initial change sets in motion a process of further changes that dampen the original change. A process whereby some initial change sets in motion a process that dampens the initial change (Macro, ESPP, TE1, TESA). Introduced in TE1, TE1, TESA, Macro. See also: positive feedback (process).

net income

Gross income minus depreciation (ESPP, TE1, TESA). Introduced in TE1, TESA. See also: income, gross income, depreciation.

net present value

The net present value of a project that will generate income at some time in the future is the present value of the stream of income, minus the present value of the associated costs (whether the costs are incurred in the present or the future). The present value of a stream of future income minus the associated costs (whether the costs are in the present or the future) (Macro, ESPP, TE1, TESA). Introduced in Macro. See also: present value.

net worth

The net worth (or equivalently, wealth) of an individual, household, or organization is the difference between the total value of its assets and the total value of its liabilities. Assets less liabilities (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.8 Borrowing may allow investing: Julia’s best hope, Macro, Macro, TE1, TESA. See also: balance sheet, equity.

network economies of scale

A firm experiences network economies of scale when an increase in the number of users of an output of the firm implies an increase in the value of the output to each of them, because they are connected to each other. These exist when an increase in the number of users of an output of a firm implies an increase in the value of the output to each of them, because they are connected to each other (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, TE1, TESA.

nominal interest rate

An interest rate is nominal if it is not corrected for inflation. The rates quoted by high-street banks on loans and savings accounts are nominal interest rates. The price of bringing some spending power (in dollars or other nominal terms) forward in time. The policy rate and the lending rate quoted by commercial banks are examples of nominal interest rates. The interest rate uncorrected for inflation. It is the interest rate quoted by high-street banks (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.6 Storing or lending allows smoothing and moving consumption to the future, 10.2 Assets, money, banks, and the financial system, Micro, Macro, Macro, TE1, TESA. See also: real interest rate, interest rate.

nominal wage

The actual amount received in payment for work, per unit of time, expressed in a particular currency. Also known as: money wage. The actual amount received in payment for work, in a particular currency. Also known as: money wage. The actual amount received in payment for work, in a particular currency. Also known as: money wage (Macro, ESPP, DE, TE1, TESA). Introduced in 8.5 The product market and the price-setting curve (firms and customers), Macro, Macro, TE1, TESA. See also: real wage.

non-excludable public good

A public good for which it is impossible to exclude anyone from having access (ESPP, TE1, TESA). Introduced in TE1, TESA. See also: artificially scarce good.

non-rival good

A good that, if available to anyone, is available to everyone at no additional cost (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure. See also: rival good, non-excludable public good.

normal good

A good for which demand increases when a person’s income rises, holding prices unchanged (ESPP). Introduced in 4.9 Applying the model: Explaining changes in working hours.

oligopoly

A market with a small number of sellers of the same good, giving each seller some market power. A market with a small number of sellers, giving each seller some market power (ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, TE1, TESA, TESA.

one-shot game

A game that is played once and not repeated (ESPP). Introduced in 2.4 Social interactions as games.

opportunity cost

What you lose when you choose one action rather than the next best alternative. Example: ‘I decided to go on vacation rather than take a summer job. The job was boring and badly paid, so the opportunity cost of going on vacation was low.’ The opportunity cost of some action A is the foregone benefit that you would have enjoyed if instead you had taken some other action B. This is called an opportunity cost because by choosing A you give up the opportunity of choosing B. It is called a cost because the choice of A costs you the benefit you would have experienced had you chosen B. When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.3 Decision making, trade-offs, and opportunity costs, 9.3 Borrowing: Bringing consumption forward in time, Micro, Micro, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA.

Pareto criterion

The Pareto criterion is a way of comparing two allocations, A and B. It states that A is an improvement on B if at least one person would be strictly better off with A than B (in other words, would strictly prefer A to B) and nobody would be worse off. We say that A Pareto dominates B. According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto efficient. According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto-efficient (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, 5.2 Institutions: The rules of the game, Micro, Micro, TE1, TESA. See also: Pareto dominant.

Pareto dominant

Allocation A Pareto dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off (ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, TE1, TESA. See also: Pareto efficient.

Pareto efficiency curve

The set of all allocations that are Pareto efficient. The Pareto efficiency curve is sometimes called the ‘contract curve’, even though it is not necessary for any contract to be involved. The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, Micro, TE1, TESA. See also: Pareto efficient.

Pareto efficient

An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off (ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, 5.3 Production and distribution: Using a model, 7.6 Gains from trade, 8.15 Looking backward: Baristas and bread markets, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA.

Pareto improvement

A change that benefits at least one person without making anyone else worse off (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, 7.6 Gains from trade, Micro, Micro, Micro, TE1, TE1, TE1, TESA, TESA, TESA. See also: Pareto dominant.

Pareto inefficient

An allocation with the property that there is some alternative technically feasible allocation in which at least one person would be better off, and nobody worse off (ESPP). Introduced in 7.14 Conclusion.

participation rate

The ratio of the number of people in the labour force to the population of working age (Macro, ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, TE1, TESA. See also: labour force, population of working age.

patent

A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time, it effectively allows the owner to be a monopolist or exclusive user. A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time it effectively allows the owner to be a monopolist or exclusive user (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.9 Unintended consequences of a redistributive tax, 10.2 Assets, money, banks, and the financial system, Micro, TE1, TE1, TESA.

payment service

Any service provided by a financial institution to allow one person or organization to pay another for a product or service (ESPP). Introduced in 10.4 Banks, profits, and the creation of money.

payoff

The benefit to each player associated with the joint actions of all the players (ESPP, TE1, TESA). Introduced in 2.4 Social interactions as games, TE1, TESA.

payoff matrix

A table of the payoffs associated with every possible combination of strategies chosen by two or more players in a game (ESPP). Introduced in 2.4 Social interactions as games.

percentile

A subset of observations, formed by ordering the full set of observations according to the values of a particular variable and then splitting the set into one hundred equally-sized groups. For example, the 1st percentile refers to the smallest 1% of values in a set of observations. A subset of observations, formed by ordering the full set of observations according to the values of a particular variable and then splitting the set into ten equally-sized groups. For example, the 1st percentile refers to the smallest 1% of values in a set of observations (ESPP, DE). See also: decile.

piece-rate work

A type of employment in which the worker is paid a fixed amount for each unit of the product that the worker produces. A type of employment in which the worker is paid a fixed amount for each unit of the product made (ESPP, TE1, TESA). Introduced in 6.4 Other people’s money: The separation of ownership and control, TE1, TESA, TESA.

Pigouvian subsidy

A government subsidy on activities that generate positive external effects, so as to correct an inefficient outcome. A government subsidy to encourage an economic activity that has positive external effects. Example: subsidizing basic research. A government subsidy to encourage an economic activity that has positive external effects. (For example, subsidizing basic research.) A government subsidy to encourage an economic activity that has positive external effects. (For example, subsidizing basic research) (Micro, Macro, ESPP, TE1, TESA). See also: external effect, Pigouvian tax

Pigouvian tax

A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.9 External effects: Government policies and income distribution, Micro, TE1, TESA. See also: external effect, Pigouvian subsidy.

policy (interest) rate, policy rate

The nominal interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. Also known as: base rate, official rate. The interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. Also known as: base rate, official rate (Macro, ESPP, TE1, TESA). Introduced in 10.2 Assets, money, banks, and the financial system, Macro, Macro, Macro, TE1, TE1, TESA, TESA. See also: real interest rate, nominal interest rate.

political accountability

Accountability achieved by political processes such as elections, oversight by an elected government, or consultation with affected citizens (ESPP, TE1, TESA). Introduced in 12.3 The government as an economic actor, TE1. See also: accountability, economic accountability.

political institution

The rules of the game that determine who has power and how it is exercised in a society (ESPP). Introduced in 12.6 Political monopoly and competition compared.

political rent

Political rent is the difference between the net benefit (monetary or otherwise) that an individual receives as a result of their political position, and the net benefit from their next best alternative (what they would receive in the absence of a privileged political position). A payment or other benefit in excess of the individual’s next best alternative (reservation position) that exists as a result of the individual’s political position. The reservation position in this case refers to the individual’s situation were they to lack a privileged political position. A payment or other benefit in excess of the individual’s next best alternative (reservation position) that exists as a result of the individual’s political position. The reservation position in this case refers to the individual’s situation were he or she to lack a privileged political position (Macro, ESPP, TE1, TESA). Introduced in 12.4 The government as a rent-seeking monopolist, Macro, TE1. See also: economic rent.

political system

A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population. A set of principles, laws, and procedures that determine how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, Micro, TE1, TESA.

politically feasible

Capable of being implemented given the existing political institutions (ESPP). Introduced in 12.7 Spending by democratic governments: Priorities of a nation.

polluter pays principle

A guide to environmental policy according to which those who impose negative environmental effects on others should be made to pay for the damages they impose, through taxation or other means (ESPP, TE1, TESA). Introduced in 11.8 External effects and private bargaining, TE1. See also: external cost.

population of working age

A statistical convention, which in many countries is all people aged between 15 and 64 years (Macro, ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, TE1, TESA.

positional good

A good—such as high status, conspicuous consumption, or power—which, if enjoyed by one member of a community is experienced negatively by others. The more one person benefits from this good, the more others are harmed (ESPP). Introduced in 4.10 Applying the model: Explaining differences between countries.

positive feedback (process)

We say that positive feedback occurs if an initial change sets in motion a process of further changes that magnify the original change. A process whereby some initial change sets in motion a process that magnifies the initial change (Macro, ESPP, TE1, TESA). Introduced in TE1, TE1, TE1, TE1, TESA, TESA, Macro. See also: negative feedback (process).

power

The ability to do (and get) the things one wants in opposition to the intentions of others. The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, Micro, TE1, TESA.

preference

Pro-and-con evaluations of the possible outcomes of the actions we may take that form the basis by which we decide on a course of action (ESPP). Introduced in 2.3 Resolving social dilemmas, 4.4 Making decisions when there are trade-offs, 9.3 Borrowing: Bringing consumption forward in time.

present value

The effective value today of a stream of income or other benefits that will be received in the future. The present value is less that the future value when future income is discounted using an interest rate or the person’s own discount rate. The value today of a stream of future income or other benefits, when these are discounted using an interest rate or the person’s own discount rate (Macro, ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, Macro, TE1, TESA. See also: net present value.

price discrimination

A selling strategy in which different prices are set for different buyers or groups of buyers based on the buyers’ differing willingness to pay. A selling strategy in which different prices for the same product are set for different buyers or groups of buyers, or per-unit prices vary depending on the number of units purchased. A selling strategy in which different prices are set for different buyers or groups of buyers, or prices vary depending on the number of units purchased (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, TE1, TESA, TESA.

price elasticity of demand

The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1 (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.9 Unintended consequences of a redistributive tax, 7.6 Gains from trade, 8.5 The product market and the price-setting curve (firms and customers), Micro, Macro, Macro, TE1, TESA.

price elasticity of supply

The percentage change in supply that would occur in response to a 1% increase in price. Supply is elastic if this is greater than 1, and inelastic if less than 1 (ESPP, TESA). Introduced in 7.12 Changes in supply and demand, TESA.

price gap

A difference in the price of a good in the exporting country and the importing country. It includes transportation costs and trade taxes. When global markets are in competitive equilibrium, these differences will be entirely due to trade costs (ESPP, TE1, TESA). Introduced in TE1. See also: arbitrage.

price markup

The price minus the marginal cost divided by the price. In other words, the profit margin as a proportion of the price. If the firm sets the price to maximize its profits, the markup is inversely proportional to the elasticity of demand for the good at that price. The price minus the marginal cost, divided by the price. It is inversely proportional to the elasticity of demand for this good. The price minus the marginal cost divided by the price. It is inversely proportional to the elasticity of demand for this good (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, 8.5 The product market and the price-setting curve (firms and customers), Micro, Macro, TE1, TESA.

price-setting (PS) curve

The curve—arising from the price-setting decisions of firms in markets for goods and services (the product market)—that gives the real wage paid when firms choose their profit-maximizing price (ESPP). Introduced in 8.5 The product market and the price-setting curve (firms and customers).

price-taker

A buyer or seller acts as a price-taker if they cannot benefit from attempting to trade at any other price than the prevailing market price. A price-taker has no power to influence the market price, but can buy or sell as many items as they wish at that price. Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, TE1, TESA.

primary markets

(ESPP, TE1). See also: secondary and primary markets

principal-agent relationship

This is an asymmetrical relationship in which one party (the principal) benefits from some action or attribute of the other party (the agent) about which the principal’s information is not sufficient to enforce in a complete contract. This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. Also known as: principal–agent problem (ESPP, DE, TE1, TESA). Introduced in 6.15 Principals and agents: Interactions under incomplete contracts, 9.8 Borrowing may allow investing: Julia’s best hope, 10.13 The role of banks in the crisis, 11.11 Public goods, common pool resources, and market failure, 12.9 Administrative feasibility: Information and capacities, TE1, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, DE. See also: incomplete contract.

prisoners' dilemma

A prisoners’ dilemma is a game that has a dominant strategy equilibrium, but also has an alternative outcome that gives a higher pay-off to all players. So the Nash equilibrium is not Pareto efficient. A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.5 When self-interest works: The invisible hand, 4.10 Applying the model: Explaining differences between countries, 8.15 Looking backward: Baristas and bread markets, Micro, TE1, TESA.

private property

Something is private property if the person possessing it has the right to exclude others from it, to benefit from the use of it, and to exchange it with others. The right and expectation that one can enjoy one’s possessions in ways of one’s own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.7 The capitalist revolution, 5.4 The rule of force: Bruno appears and has unlimited power over Angela, Micro, Micro, TE1, TE1, TESA, TESA.

procedural judgements of fairness

An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is) (ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, TE1, TESA. See also: substantive judgements of fairness.

producer surplus

The producer of a good receives a surplus on each unit, equal to the price minus the marginal cost of producing it. The term ‘producer surplus’ normally refers to the sum of these surpluses across all units sold. The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, Micro, Micro, TE1, TESA.

production function

A production function is a graphical or mathematical description of the relationship between the quantities of the inputs to a production process and the amount of output produced. When used to represent output in the whole economy, it is described as an aggregate production function. A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TESA, TESA, TESA.

profit margin

The difference between the price of a product and its marginal production cost. The difference between the price and the marginal cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, 8.5 The product market and the price-setting curve (firms and customers), Micro, Micro, Macro, TE1, TESA.

property rights

Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned. Property rights may cover broadly-defined goods such as clean water, safety, or education, if these are protected by the legal system (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.7 Market failure: External effects of pollution, Micro, Micro, TE1, TESA.

public bad

The negative equivalent of a public good. It is non-rival in the sense that a given individual’s consumption of the public bad does not diminish others’ consumption of it (ESPP, TE1, TESA). Introduced in 11.11 Public goods, common pool resources, and market failure, TE1, TESA.

public good

A good that, if available to anyone, can be made available to everyone at no additional cost. This characteristic is called non-rivalry. Some economists define public goods more strictly as goods that are both non-rival and non-excludable (non-excludable means that it is impossible to prevent anyone from consuming them). A good for which use by one person does not reduce its availability to others. Also known as: non-rival good (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.7 Free riding and the provision of public goods, Micro, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA. See also: non-excludable public good, artificially scarce good.

public goods game

Similar to a prisoners’ dilemma game with more than two people; the dominant strategy is not to contribute to the public good (ESPP). Introduced in 8.15 Looking backward: Baristas and bread markets.

public policy

A policy decided by the government. Also known as: government policy (ESPP). Introduced in 3.2 Goals of public policy, 5.9 Measuring economic inequality.

purchasing power parity (PPP)

PPPs are price indices that measure how much it costs to purchase a basket of goods and services compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 211. A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.3 How did we get here? The hockey stick in real incomes, Micro, Macro, TE1, TESA. See also: constant prices.

pure impatience

In a situation in which a person’s endowment is the same amount of consumption this period and later, she would have this characteristic if she values an additional unit of consumption now over an additional unit later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons. This is a characteristic of a person who values an additional unit of consumption now over an additional unit later, when the amount of consumption is the same now and later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons (ESPP, TE1, TESA). Introduced in 9.4 Reasons to borrow: Smoothing and impatience, TE1, TE1, TESA. See also: weakness of will.

ratio scale

Graphs are usually plotted using linear scales: the points marked on the axis are a fixed distance apart, and as we move along the axis from one point to the next, the corresponding variable increases by a constant amount. If instead we use a ratio scale, moving from one point to the next represents a constant proportional increase. For example, if a ratio scale with a factor of 2 starts with a value of 5 at the origin, the next points shown along the axis would be at values 1, 2, 4, 8… Ratio scales are useful for variables like aggregate output that tend to change in a proportional way. If output grows at a constant rate (e.g. 3% per annum) and is plotted against time using a ratio scale on the vertical axis, the graph will be a straight line. A scale that uses distances on a graph to represent ratios. For example, the ratio between 3 and 6, and between 6 and 12, is the same (the larger number is twice the smaller number). In a ratio scale chart, all changes by the same ratio are represented by the same vertical distance. This contrasts with a linear scale, where the distance between 3 and 6, and between 6 and 9, is the same (in this case, 3). Also known as a log scale (in for example, Microsoft Excel). A scale that uses distances on a graph to represent ratios. For example, the ratio between 3 and 6, and between 6 and 12, is the same (the larger number is twice the smaller number). In a ratio scale chart, all changes by the same ratio are represented by the same vertical distance. This contrasts with a linear scale, where the distance between 3 and 6, and between 6 and 9, is the same (in this case, 3). Also known as a log scale (in for example, Microsoft Excel) (Macro, ESPP, TE1). Introduced in 1.4 Economic growth, Macro.

real GDP

An inflation-adjusted measure of the market value of the output of the economy in a given period. (GDP) (ESPP). Introduced in 1.3 How did we get here? The hockey stick in real incomes. See also: inflation, constant prices, gross domestic product.

real interest rate

An interest rate corrected for expected inflation (that is, the nominal interest rate minus the expected rate of inflation). It represents how many goods in the future one gets for the goods not consumed now. The price of bringing some real spending power forward in time. The interest rate corrected for inflation (that is, the nominal interest rate minus the rate of inflation). It represents how many goods in the future one gets for the goods not consumed now (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.6 Storing or lending allows smoothing and moving consumption to the future, Micro, Macro, Macro, TE1, TESA. See also: nominal interest rate, interest rate.

real wage

The wage expressed in terms of the amount of goods and services the worker can buy with it. It is calculated by dividing the nominal wage by the current price level in the same currency. The nominal wage, adjusted to take account of changes in prices between different time periods. It measures the amount of goods and services the worker can buy (Macro, ESPP, DE, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, Macro, TE1, TE1, TESA, TESA. See also: nominal wage.

reciprocity

A preference to be kind to or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind. A preference concerning one’s actions towards others that depends on an evaluation of the others’ actions or character, for example, a preference to help those who have helped you or in some other way acted well (in your opinion), and to harm those who have acted poorly. It is considered a social preference. A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.8 Social preferences and the public good, Micro, TE1, TESA. See also: social preferences.

repeated game

A game in which the same interaction (same payoffs, players, feasible actions) may occur more than once. A game in which the same interaction (same payoffs, players, feasible actions) may be occur more than once (ESPP, TE1, TESA). Introduced in 2.6 When self-interest doesn’t work: The prisoners’ dilemma.

repugnant market

Buying or selling something that people believe ought not to be exchanged on a market (ESPP). Introduced in 12.2 The limits of markets: Repugnant markets and merit goods.

research and development

Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, TE1, TESA.

reservation indifference curve

A curve that indicates combinations of goods that are as highly valued as one’s reservation option. A curve that indicates allocations (combinations) that are as highly valued as one’s reservation option (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, 9.4 Reasons to borrow: Smoothing and impatience, Micro, Micro, TE1, TE1, TESA, TESA. See also: reservation option.

reservation option

When someone makes a choice amongst the available options in a particular transaction, the reservation option is their next best alternative option. Also known as: fallback option. A person’s next best alternative among all options in a particular transaction. Also known as: fallback option (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, 11.8 External effects and private bargaining, Micro, Micro, Micro, Micro, TE1, TE1, TE1, TESA, TESA, TESA. See also: reservation price.

reservation price

The lowest price at which someone is willing to sell a good. The lowest price at which someone is willing to sell a good (keeping the good is the potential seller’s reservation option) (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, TE1, TESA. See also: reservation option.

reservation wage

The reservation wage is the lowest wage a worker is willing to accept to take up a new job. It is the wage available in the worker’s next best job option (the reservation option). For workers whose next best option is unemployment, the reservation wage takes into account the wages they expect to receive when they find a new job as well as any income received while unemployed. What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.7 Employment rents, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TESA, TESA.

residual claimant

The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example, the cost of hiring workers and paying taxes). The person who receives the income left over from a firm or project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes). The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes) (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.4 Other people’s money: The separation of ownership and control, Micro, TE1, TESA.

risk aversion

A preference for certain over uncertain outcomes (ESPP). Introduced in 10.6 The business of banking and bank balance sheets.

rival good

A good which, if consumed by one person, is not available to another (ESPP, TE1, TESA). See also: non-rival good.

saving

When consumption expenditure is less than net income, saving takes place and wealth rises (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.2 Income, consumption, and wealth, Micro, TE1, TESA. See also: wealth.

scarcity

A good is scarce if it is valued, and there is an opportunity cost of acquiring more of it. A good that is valued, and for which there is an opportunity cost of acquiring more (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.13 The world oil market, Micro, TESA, TESA.

secondary and primary markets

The primary market is where goods or financial assets are sold for the first time. For example, the initial sale of shares by a company to an investor (known as an initial public offering or IPO) is on the primary market. The subsequent trading of those shares on the stock exchange is on the secondary market. The terms are also used to describe the initial sale of tickets (primary market) and the secondary market in which they are traded (ESPP, TE1, TESA). Introduced in 10.9 Changing supply and demand for a financial asset, TE1, TESA.

separation of ownership and control

The attribute of some firms by which managers are a separate group from the owners (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.4 Other people’s money: The separation of ownership and control, Micro, TE1, TESA.

sequential game

A game in which players do not all choose their strategies at the same time, and players who choose later can see the strategies already chosen by the other players. An example is the ultimatum game. A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, Micro, TE1, TESA. See also: simultaneous game.

share

A part of the assets of a firm that may be traded. It gives the holder a right to receive a proportion of a firm’s profit and to benefit when the firm’s assets become more valuable. Also known as: common stock (ESPP, TE1, TESA). Introduced in 1.7 The capitalist revolution, 6.4 Other people’s money: The separation of ownership and control, TE1, TE1, TESA, TESA.

shock

An exogenous change in some of the fundamental data or variables used in a model. An exogenous change in some of the fundamental data used in a model (ESPP, TE1, TESA). Introduced in 7.12 Changes in supply and demand, TE1, TE1, TESA, TESA.

simultaneous game

A game in which the players choose their strategies simultaneously, for example, the prisoners’ dilemma. A game in which players choose strategies simultaneously, for example the prisoners’ dilemma (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.4 Social interactions as games, Micro, Micro, TE1, TESA. See also: sequential game.

social dilemma

A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals. A situation in which actions, taken independently by individuals in pursuit of their own private objectives, may result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals. A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.1 Introduction, 11.1 Introduction, Micro, TE1, TE1, TESA, TESA.

social insurance

Expenditure by the government, financed by taxation, which provides protection against various economic risks (for example, loss of income due to sickness, or unemployment) and enables people to smooth incomes throughout their lifetime (ESPP, TE1, TESA). Introduced in 12.7 Spending by democratic governments: Priorities of a nation, TE1, TE1. See also: co-insurance.

social interaction

A situation in which the actions taken by each person affect other people’s outcomes as well as their own (ESPP). Introduced in 2.2 Two types of social interaction.

social norm

An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.10 How three kinds of social preferences address social dilemmas, Micro, TE1, TE1, TESA, TESA.

social preferences

An individual is said to have social preferences if their individual utility depends on what happens to other people, as well as on their own pay-offs. A person with social preferences cares not only about how her action affects her personally, but also about how it affects other people. Also known as: other-regarding preferences. Preferences that place a value on what happens to other people, even if it results in lower payoffs for the individual. Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.3 Resolving social dilemmas, Micro, TE1, TE1, TESA.

solvent

A firm or individual for which net worth is positive or zero. For example, a bank whose assets are more than its liabilities (what it owes). A firm or individual for which net worth is positive or zero. For example, a bank for this assets are more than its liabilities (what it owes) (ESPP, TE1, TESA). See also: insolvent.

specialization

This takes place when a country or some other entity produces a narrower range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade. This takes place when a country or some other entity produces a more narrow range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade (ESPP, TE1, TESA). Introduced in 1.4 Economic growth, TE1.

speculative finance

A strategy used by firms to meet payment commitments on liabilities using cash flow, although the firm cannot repay the principal in this way. Firms in this position need to ‘roll over’ their liabilities, usually by issuing new debt to meet commitments on maturing debt. Term coined by Hyman Minsky in his Financial Instability Hypothesis (ESPP, TE1, TESA). Introduced in TE1. See also: hedge finance.

stock exchange

A financial marketplace where shares (also known as stocks) and other financial assets are traded. It has a list of companies whose shares are traded there. A financial marketplace where shares (or stocks) and other financial assets are traded. It has a list of companies whose shares are traded there (ESPP, TE1, TESA). Introduced in 10.9 Changing supply and demand for a financial asset, TE1, TESA. See also: share.

stock variable

A quantity measured at a point in time. Its units do not depend on time (ESPP). Introduced in 9.2 Income, consumption, and wealth. See also: flow variable.

strategic interaction

A social interaction in which the participants are aware of the ways in which their actions affect others (and the ways in which the actions of others affect them). A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them) (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.4 Social interactions as games, Micro, TE1, TESA.

strategy

An action (or action plan) that a person may choose, while being aware that the outcomes for themselves and others depend on their own strategy and the strategies chosen by others. An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person’s actions, but also on the actions of others (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.4 Social interactions as games, Micro, TE1, TESA.

structural unemployment

The level of unemployment where the supply side of the economy is in equilibrium. In the WS–PS model, it is the unemployment level at which the price-setting real wage equals the wage-setting real wage. The level of unemployment at the Nash equilibrium of the labour and product market model (Macro, ESPP). Introduced in 8.5 The product market and the price-setting curve (firms and customers), Macro, Macro, Macro, Macro. See also: WS–PS model, Nash equilibrium, supply side.

subprime borrower

An individual with a low credit rating and a high risk of default (ESPP, TE1, TESA). Introduced in 10.12 Banks, housing, and the global financial crisis, TE1. See also: subprime mortgage.

subprime mortgage

A residential mortgage issued to a high-risk borrower, for example, a borrower with a history of bankruptcy and delayed repayments (ESPP, TE1, TESA). Introduced in 10.12 Banks, housing, and the global financial crisis, TE1. See also: subprime borrower.

substantive judgements of fairness

Judgements based on the characteristics of the allocation itself, not how it was determined (ESPP, TE1, TESA). Introduced in 3.3 Fairness and efficiency in the ultimatum game, TE1, TESA. See also: procedural judgements of fairness.

substitutes

Two goods (or services) are described as substitutes when consumers would readily replace one with the other if the prices were similar. If the price of one of the goods increased, consumers would be more likely to choose the other (so demand for it would increase). Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, Micro, TE1, TE1, TESA. See also: complements.

substitution effect

When the price of a good changes, the substitution effect is the change in the consumption of the good that occurs because of the change in the good’s relative price. The price change also has an income effect, because it expands or shrinks the feasible set. The effect for example, on the choice of consumption of a good that is only due to changes in the price or opportunity cost, given the new level of utility. The effect that is only due to changes in the price or opportunity cost, given the new level of utility (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.9 Applying the model: Explaining changes in working hours, 8.6 Wages, profits, and unemployment in the aggregate economy, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TESA. See also: income effect.

supply curve

A supply curve shows the number of units of output that would be supplied to the market at any given price. The firm’s supply curve shows the units supplied by an individual firm, and the market (or industry) supply curve shows the total number of units supplied by all sellers in the market (or firms in the industry). Also known as: supply function. The curve that shows the number of units of output that would be produced at any given price. For a market, it shows the total quantity that all firms together would produce at any given price (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, Micro, TE1, TESA.

tangency

When a line touches a curve, but does not cross it. When two curves share one point in common but do not cross. The tangent to a curve at a given point is a straight line that touches the curve at that point but does not cross it (ESPP, TE1, TESA). Introduced in 4.8 Hours of work and economic growth, 6.9 The employer sets the wage to minimize the cost per unit of effort, TE1, TESA.

tax

A tax is a compulsory payment to the government levied, for example, on workers’ incomes (income taxes) or firms’ profits (profit taxes) or included in the price paid for goods and services (value added or sales taxes). A compulsory payment to the government levied, for example, on workers’ incomes (income taxes) and firms’ profits (profit taxes) or included in the price paid for goods and services (value added or sales taxes) (Macro, ESPP). Introduced in 3.3 Fairness and efficiency in the ultimatum game, Macro, Macro.

technically feasible

An allocation within the limits set by technology and biology (ESPP, TE1, TESA). Introduced in 5.4 The rule of force: Bruno appears and has unlimited power over Angela, TE1, TESA.

technological progress

A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, 4.8 Hours of work and economic growth, Micro, TE1, TESA.

technology

The description of a process that uses a set of materials and other inputs, including the work of people and machines, to produce an output. A process taking a set of materials and other inputs, including the work of people and capital goods (such as machines), to produce an output. The description of a process using a set of materials and other inputs, including the work of people and machines, to produce an output. A process taking a set of materials and other inputs, including the work of people and machines, to produce an output (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Economic growth, Micro, Micro, Micro, TE1, TESA.

too big to fail

Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks (ESPP, TE1, TESA). Introduced in 1.10 Varieties of capitalism: Growth and stagnation, TE1, TE1, TESA. See also: moral hazard.

total surplus

The total gains from trade received by all parties involved in the exchange. It is measured as the sum of the consumer and producer surpluses. See: joint surplus (ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, TE1, TESA.

trade union

An organization consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its members (ESPP, TE1, TESA). Introduced in 8.11 Labour unions: Bargained wages and the union voice effect, TE1, TESA.

trademark

A logo, a name, or a registered design typically associated with the right to exclude others from using it to identify their products (ESPP, TE1, TESA). Introduced in 10.2 Assets, money, banks, and the financial system, TE1.

tragedy of the commons

A social dilemma in which self-interested individuals acting independently deplete a common resource, lowering the payoffs of all (ESPP, TE1, TESA). Introduced in 2.2 Two types of social interaction, TE1. See also: social dilemma.

transaction costs

Costs that impede the bargaining process or the agreement of a contract. They include costs of acquiring information about the good to be traded, and costs of enforcing a contract (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.8 External effects and private bargaining, Micro, TE1, TESA.

ultimatum game

A game in which the first player proposes a division of a ‘pie’ with the second player, who may either accept, in which case they each get the division proposed by the first person, or reject the offer, in which case both players receive nothing. An interaction in which the first player proposes a division of a ‘pie’ with the second player, who may either accept, in which case they each get the division proposed by the first person, or reject the offer, in which case both players receive nothing (Micro, Macro, ESPP). Introduced in 3.3 Fairness and efficiency in the ultimatum game, Micro, Micro.

unemployment

A situation in which a person who is able and willing to work is not employed (ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, TE1, TESA.

unemployment benefit

A government transfer that is paid to an unemployed person while they are unemployed (or for part of the unemployment period). Also known as unemployment insurance. A government transfer that is paid to an unemployed person while they are unemployed (or for part of the unemployment period). Also known as: unemployment insurance. A government transfer received by an unemployed person. Also known as: unemployment insurance (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.4 Other people’s money: The separation of ownership and control, Micro, Macro, Macro, TE1, TESA.

unemployment rate

The unemployment rate is the fraction of the total labour force that is seeking work, but is not currently employed. The ratio of the number of the unemployed to the total labour force. (Note that the employment rate and unemployment rate do not sum to 100%, as they have different denominators.) The ratio of the number of the unemployed to the total labour force. (Note that the employment rate and unemployment rate do not sum to 100%, as they have different denominators) (Macro, ESPP, TE1, TESA). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, TE1, TESA. See also: labour force, employment rate.

union voice effect

The union voice effect refers to the beneficial effect that a trade union, by providing a ‘voice’ to otherwise unheard workers, can have on their treatment by employers and their job satisfaction. The positive effect on labour effort (and hence labour productivity) of trade union members’ sense that they have a say (a voice) in how the firm is run (Macro, ESPP). Introduced in 8.11 Labour unions: Bargained wages and the union voice effect, Macro.

unit cost

Total cost divided by number of units produced. Total cost divided by the number of units produced (ESPP, TESA). Introduced in 7.1 Introduction, TESA.

utility

A numerical indicator of the value that one places on an outcome. Outcomes with higher utility will be chosen in preference to lower valued ones when both are feasible. A numerical indicator of the value that one places on an outcome, such that higher-valued outcomes will be chosen over lower-valued ones when both are feasible. A numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.4 Making decisions when there are trade-offs, 6.4 Other people’s money: The separation of ownership and control, 9.4 Reasons to borrow: Smoothing and impatience, Micro, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TESA, TESA, TESA.

Veblen effect

A negative effect on others that arises from a person’s consumption of goods such as luxury housing, clothing, or vehicles, that display or signal social status. A negative external effect that arises from the consumption of a positional good. Examples include the negative external effects imposed on others by the consumption of luxury housing, clothing, or vehicles (Micro, Macro, ESPP). Introduced in 4.10 Applying the model: Explaining differences between countries, Micro. See also: conspicuous consumption.

verifiable information

Information is verifiable if it can be verified by a court and hence used to enforce a contract. Information that can be used to enforce a contract (Micro, Macro, ESPP, TE1, TESA). Introduced in 11.10 Property rights, contracts, and market failures, Micro, TE1, TESA.

wage labour

A system in which producers are paid for the time they work for their employers (ESPP, TE1, TESA). Introduced in 6.2 Firms, markets, and the division of labour, TE1, TESA.

wage-setting (WS) curve

The curve—arising from the wage-setting decisions of firms in the labour market—that gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well (ESPP). Introduced in 8.2 Measuring the economy: Employment and unemployment.

wage subsidy

A government payment either to firms or employees, to raise the wage received by workers or lower the wage costs paid by firms, with the objective of increasing hiring and workers’ incomes (Macro, ESPP). Introduced in 8.13 Labour market policies to address unemployment and inequality, Macro.

weakness of will

The inability to commit to a course of action (dieting or foregoing some other present pleasure, for example) that one will regret later. It differs from impatience, which may also lead a person to favour pleasures in the present, but not necessarily act in a way that one regrets (ESPP, TE1, TESA). Introduced in TE1, TESA.

wealth

The stock of things owned, or value of that stock. Wealth may generate income, or contribute to the owner’s wellbeing in some other way. It includes the market value of a home, car, any land, buildings, machinery, or other capital goods that a person may own, and any financial assets such as shares or bonds. To calculate wealth, debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added. Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery, or other capital goods that a person may own, and any financial assets, such as bank deposits, shares, bonds, or loans made to others. Debts to others are subtracted from wealth—for example, the mortgage owed to the bank. Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery or other capital goods that a person may own, and any financial assets such as shares or bonds. Debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.2 Income, consumption, and wealth, Micro, Macro, Macro, TE1, TESA.

willingness to accept (WTA)

An indicator of how much a person values a good, measured by the minimum amount of money they would accept in exchange for a unit of the good (that is, their reservation price). The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.9 Buying and selling: Demand and supply in a competitive market, Micro, TE1, TESA. See also: willingness to pay.

willingness to pay (WTP)

An indicator of how much a person values a good, measured by the maximum amount they would pay to acquire a unit of the good. An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Introduction, Micro, Micro, TE1, TE1, TESA, TESA. See also: willingness to accept.

worker-owned cooperative

A form of business in which a substantial fraction of the capital goods are owned by employees rather than being owned by those who are not involved in production in the firm; worker-owners typically elect a manager to make day-to-day decisions (ESPP). Introduced in 6.13 Another kind of business organization: Cooperative firms.

worker's best response function (to wage)

The amount of work that a worker chooses to perform as her best response to each wage that the employer may offer. Also known as: best response curve. The optimal amount of work that a worker chooses to perform for each wage that the employer may offer (ESPP, TE1, TESA). Introduced in 6.8 Work effort and wages: The labour discipline model, 8.2 Measuring the economy: Employment and unemployment, TE1, TESA.

WS-PS model, WS/PS model

Model of the aggregate economy that combines wage-setting (WS) and price-setting (PS) decisions. Where the WS and PS curves intersect is the Nash equilibrium and determines structural unemployment and the real wage (Macro, ESPP). Introduced in 8.2 Measuring the economy: Employment and unemployment, Macro, Macro, Macro. See also, wage-setting curve, price-setting curve, structural unemployment.

yield

The implied rate of return that the buyer gets on their money when they buy a bond at its market price (ESPP, TE1, TESA). Introduced in 10.4 Banks, profits, and the creation of money, TE1, TESA.